In the Layered Bitcoin article, I presented three types of bridges: trustless, trust-minimised, and custodial. These serve as the backbone of cross-chain asset transfers, particularly for Bitcoin. Here’s a quick recap before diving into today’s story:

Trustless bridges act like a portal between chains, offering the highest level of security because they don’t rely on any central authority. However, they are currently impractical, largely because Bitcoin, as the source chain, cannot verify events happening outside its network. For instance, Bitcoin cannot natively verify events occurring on Ethereum, which limits the viability of trustless bridges.

Custodial bridges, however, use a centralised provider to manage asset transfers. These providers hold users’ BTC (Bitcoin) on the Bitcoin network and mint synthetic tokens, or wrappers, on destination chains like Ethereum. While easy to set up and maintain, custodial bridges introduce significant risk as they rely on a single trusted party, which becomes a point of failure.

Trust-minimised bridges attempt to combine the best aspects of the two models. Instead of relying on one entity to hold users’ BTC, they involve multiple reputable entities in storing and managing assets, offering a balance between security and practicality. These bridges employ decentralised mechanisms to reduce the risk of any one entity failing or acting maliciously.

Today’s focus revolves around BitGo, the custodian behind Wrapped Bitcoin (WBTC). WBTC is one of the most widely used Bitcoin wrappers, particularly across Ethereum Virtual Machine (EVM) compatible chains. It has been the dominant form of wrapped Bitcoin on Ethereum, allowing BTC holders to participate in Ethereum’s DeFi ecosystem. Alongside WBTC, other forms of wrapped Bitcoin, such as tBTC, renBTC, HBTC, and imBTC are also used across various ecosystems, but none have come close to WBTC’s scale.

A deal with the devil?

On 9th August 2024, BitGo, the primary custodian for WBTC, announced a partnership with BiT Global. This was not just a routine business collaboration. It involved a major shift in control over WBTC’s multi-signature wallet, which has raised significant concerns in the crypto community.

Under the new arrangement, BiT Global was supposed to control two out of three keys in the 2-of-3 multisig wallet that secures WBTC. In simple terms, BitGo would become redundant in all practical senses, as BiT Global would have majority control over WBTC holdings. This has triggered fears about centralisation and security vulnerabilities, especially given Justin Sun’s involvement with BiT Global. After community backlash, there is a new proposal that said BitGo will retain control of 2 keys. However, issues surrounding Justin Sun’s involvement still persist.

BiT Global cited Hong Kong’s legal requirements to defend this move, stating that no single shareholder can hold more than 20% control in a company. The corporate registry indicates that all of the five listed shareholders share the same British Virgin Islands address. This has fuelled suspicions that Justin Sun, although not formally listed, still has a disproportionate influence over BiT Global. While there is no direct proof, the circumstantial evidence has raised serious questions within the community about the true level of decentralisation in this new structure.

Centralisation is a serious concern in crypto, especially when the asset in question is Bitcoin, a symbol of financial sovereignty and decentralisation. By placing control in the hands of BiT Global, WBTC now faces increased regulatory risks. Should any legal issues arise involving Justin Sun or BiT Global - WBTC holders could find their assets locked, seized, or otherwise compromised.

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BitGo’s Motivation: Market Dominance Is Not Enough

At first glance, BitGo’s decision to relinquish control seems puzzling, especially as WBTC controls over 95% of the wrapped Bitcoin market on Ethereum. With such overwhelming market dominance, why give up control?

The answer lies in BitGo’s revenue model for WBTC, which depends on the fees generated from minting and redeeming the token. There are no fees for simply holding WBTC on users’ behalf. However, minting and redeeming activity has stagnated over the past couple of years. While WBTC remains widely held, the lack of movement has likely caused a decline in BitGo’s revenues from this service.

This situation highlights an important point: market dominance does not always translate into profitability. BitGo’s control of the WBTC market does not necessarily mean it is financially thriving. With fewer mints and redemptions, the platform’s income from WBTC is shrinking, and this is likely a factor in BitGo’s decision to partner with BiT Global—perhaps as a way to offload some operational burden while seeking alternative revenue streams.

This situation also serves as a warning to other projects: controlling a large share of a market does not guarantee sustained success unless the model is profitable. Monetisation strategies need to be continually aligned with user engagement to ensure long-term sustainability.

New Players Trying to Make the Most of the Situation

As BitGo navigates its partnership with BiT Global, new players are emerging in the wrapped Bitcoin market. Notably, Coinbase has announced plans to introduce its own wrapped BTC, while 21Shares has already deployed a version on Ethereum. These institutional players are moving into the space with revenue models similar to BitGo, relying on fees for minting and redeeming wrapped BTC.

However, there is a key difference. Companies like Coinbase and 21Shares have existing revenue streams that can subsidise these operations. Minting and redeeming wrapped BTC can function as an additional service to their core businesses rather than a primary revenue source. Unlike BitGo, this allows them to enter the space without prioritising immediate profitability, which relies heavily on WBTC for its earnings.

These new entrants also signal a shift in the market. As institutional players step in, they bring greater credibility to the concept of wrapped Bitcoin. However, their custodial models, while familiar to traditional finance, may still introduce the same centralisation risks we see with WBTC.

The tBTC Alternative

In contrast to these custodial models, tBTC, developed by the Threshold Network, offers a trust-minimised, decentralised alternative. tBTC uses cryptography to secure Bitcoin deposits, requiring a threshold majority of decentralised operators to manage the wrapped assets. This model is far more resistant to centralisation risks than WBTC. Newer participants like Botanix have similar designs.

Here is how tBTC works: a randomly selected group of operators manages the Bitcoin deposits, ensuring no single entity has too much control. These operators must reach a consensus before any action can be taken, and the selection process rotates regularly, ensuring no one group can seize control of the funds. This structure sharply contrasts with WBTC, where BiT Global could technically move users’ BTC with just two signatures—both controlled by the same organisation.

The trust-minimised model that tBTC employs has several benefits. Most notably:

• Decentralisation: No single entity controls the system, reducing the risks of censorship or asset seizure.
• Transparency: All minting and redeeming activities occur on-chain, giving users full visibility.
• Ecosystem support: Projects like Mezo and Acre are building on top of tBTC, expanding its utility within DeFi.

Unlike WBTC, tBTC does not need to generate revenue from minting and redeeming fees. Instead, the broader Threshold Network ecosystem provides financial sustainability without putting tBTC under constant pressure to monetise the protocol.

The reason I say this is that Mezo is like an Ethereum L2. Users pay fees to access products on Mezo. These fees are distributed to MEZO and BTC stakers. This mechanism not only incentivises network participation but also creates a sustainable income model tied to the usage of Mezo’s products. This is one of the revenue sources for the Thesis ecosystem.

Similarly, another revenue stream for the ecosystem can be in the form of staking yield generated by Acre. The mint/redeem functionality provided by the Threshold Network for tBTC represents a vertical integration within Thesis’s service offerings. This integration allows Thesis to capture value at multiple points, from initial minting to DeFi product usage, creating a more robust and sustainable business model.

Unlocking Bitcoin’s Potential in DeFi

One often overlooked factor in the debate over custodial versus decentralised solutions is User Experience (UX). Decentralisation is crucial for long-term sustainability. However, if the process of using a decentralised solution like tBTC is too complex or time-consuming, users may gravitate towards simpler custodial models like WBTC.

A smoother UX can

• Increase adoption by lowering the technical barrier for users.
• Enhance liquidity as more users participate in minting and redeeming.
• Attract institutional investors who value ease of integration into their systems.

For decentralised solutions like tBTC to succeed, improving UX is essential. The goal is to offer the benefits of decentralisation without overwhelming users with complexity. The solution that strikes this balance will likely see the greatest adoption and liquidity growth over time.

Growing Acceptance of tBTC

Despite the challenges, tBTC has steadily gained traction in the DeFi space. One significant milestone was when Aave, one of the largest decentralised lending protocols, accepted tBTC as collateral. This move is a testament to the trust the DeFi ecosystem is placing in decentralised, trust-minimised solutions.

Additionally, MakerDAO—a pioneer in decentralised finance—has removed WBTC as collateral, citing concerns over its increasing centralisation. There’s now a proposal to add tBTC as collateral for DAI (a stablecoin), further cementing its position as a viable decentralised alternative to custodial Bitcoin wrappers. Furthermore, Curve has integrated tBTC as collateral for crvUSD, further diversifying its utility within the DeFi ecosystem.

Further incentivising this transition, Threshold Network is sponsoring migrations from WBTC to tBTC on wbtc.party. Anyone who signs the pledge and swaps into tBTC will not only receive reimbursement for gas fees and slippage incurred in the swap, they’ll also be eligible for a share of a $150k tBTC reward pool. So you are getting paid to swap to a decentralised Bitcoin wrapper! More info on the incentive program here.

As more protocols adopt tBTC as collateral, a network effect begins to take shape. Increased collateral acceptance leads to more yield opportunities, encouraging users to mint tBTC and participate in the broader DeFi ecosystem. This feedback loop could eventually see tBTC’s liquidity and usage grow exponentially, particularly if users prioritise decentralisation and security over convenience.

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PvP or PvE?

While competition between wrapped Bitcoin solutions is fierce, the bigger picture reveals a vast, untapped opportunity. Currently, all wrapped Bitcoin tokens combined account for less than 1% of Bitcoin’s total supply, leaving 99% of Bitcoin, worth over $1.1 trillion, untapped for DeFi.

The real opportunity lies not in battling for WBTC’s market share but in unlocking this enormous pool of unbridged Bitcoin. The protocol that can offer the best UX for Bitcoin holders to participate in DeFi will be the overall winner.

Projects like Thesis, with its Mezo and Acre initiatives, are already simplifying Bitcoin’s use in finance. You can read about all of this here.

Like these projects, if you are working on a solution that puts BTC to use or helps do so, please get in touch with us.

Ultimately, the future of wrapped Bitcoin will be defined not by current market share but by how well solutions can tap into the 99% of untapped Bitcoin. The protocol that successfully achieves this expansion will likely lead the market.

Disclaimer：

1. This article is reprinted from [decentralised], All copyrights belong to the original author [Saurabh Deshpande]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.